Inaki Urdangarin - the husband of King Juan Carlos and Queen Sofia's youngest daughter Infanta Cristina - is suspected of misappropriating cash paid into an NGO.
The former handball player now faces a possible interrogation by investigating judge Jose Castro and risks causing huge embarrassment for the royals.
It is claimed that his non-profit company, Instituto Noos, was given an enormous 2.3million euros (just under £2million) by the Balearic Islands’ regional government to organise two conferences on tourism and sport in 2005 and 2006.
The judicial investigation is looking into whether the bills for the events were inflated and if the money ended up in private companies run by Urdangarin, who is Duke of Palma, the capital of Majorca.
Urdangarin, 43, left Instituto Noos in 2006, months after the exorbitant sums paid by the Balearic government were revealed by the Socialist Party.
He said today: 'I cannot comment about on-going judicial proceedings.'
The prosecution claims Urdangarin and his associate Diego Torres created a network of societies with which they diverted public and private funds received by Instituto Noos.
Under suspicion: The former handball star is charged with creating a network of societies into which he diverted private and public funds
Regal scandal: Princess Cristina and Urdangarin (far right) pose with Spain's royal family King Juan Carlos, Queen Sofia, Crown Prince Felipe and wife Princess Letizia and Princess Elena
They are under investigation for document falsification, corruption, fraud and embezzlement, and Torres’s home has been searched.
The Royal Household expressed its 'absolute respect' for the legal decisions and added that it has 'nothing to say at this moment' as this is 'an investigation which must follow its course'.
The Duke and Duchess, who married in 1997, now live in Washington, DC. The couple have four children.
Urdangarin played in Spain’s national handball team at three Olympic Games, captaining the side for Sydney 2000.